It's still difficult for Europeans to buy a house

With a salary increase this year, Europeans' ability to buy a house is still difficult to improve when real estate prices increase and loan interest rates remain high.

This is the opinion of a recent study by experts at the ING Group financial corporation headquartered in Amsterdam (Netherlands). The European Statistical Office's house price index (Eurostat) shows that both buying and renting prices in this area have increased steadily over the past decade.

Along with that, mortgage interest rates in the eurozone have nearly tripled in just the past 2 years. "Increased financing costs have placed a significant burden on potential home buyers and thereby reduced the affordability of residential real estate," ING said.

The general rise in the cost of living – which has wiped out most of the nominal wage growth – has aggravated the situation. Accordingly, many people decided to pause their spending plans, leading to a significant decrease in demand for home loans. Last year, demand for home loans decreased by about 30% compared to 2022.

Buying (purple) and renting (green) price index in Europe. Photo: Eurostat

By 2024, Europeans' access to housing is unlikely to improve for a number of reasons. First, prices are expected to increase due to low supply. ING believes that house prices will recover slightly this year. The housing shortage could be exacerbated by high material costs and a lack of skilled workers in the construction sector.

For example, a report by the Ifo Economic Institute (Germany) published in February said that Germany expected to hand over only 200,000 new houses in 2026, a decrease of 40% compared to 2022. "In general, construction is over complex and expensive. Regulations, especially on energy, have increased construction costs steadily over the past three decades," said Ludwig Dorffmeister, real estate expert at the Ifo Institute.

Meanwhile, financial costs for home loans this year are not expected to decrease significantly. In Europe, developments in mortgage interest rates are closely related to interest rates in the long-term capital market. At the end of last year, long-term interest rates in the eurozone fell by more than 50 basis points due to financial market expectations that the European Central Bank (ECB) would cut its base interest rate in 2024.

Because future ECB interest rate cuts will already have an impact on current capital markets, a new series of unexpectedly strong interest rate cuts will be required to pull down capital markets and mortgage rates, according to ING. .

Therefore, this year's salary increase alone is not enough to improve Europeans' ability to buy a house. Nominal wages in the eurozone have increased sharply over the past two years. However, they have not increased enough to compensate for high inflation. Therefore, real wages decrease in each quarter, from the first quarter of 2021 to the second quarter of 2023.

From the second half of 2023, falling inflation has created conditions for real wages to increase slightly, although not enough to compensate for the decline during the previous two years. ING forecasts that wage growth in the euro zone may have peaked and will decelerate from here on out.

The bright spot is that this year's nominal wage growth is expected to be stronger than before and, more importantly, stronger than inflation, pulling real wages up, thereby returning purchasing power to consumers. But even with rising incomes, Europeans are not necessarily confident in buying a house. They are more likely to increase savings and not necessarily invest in real estate while the economy is still unstable and savings interest rates are also attractive.